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A Note on Dollar Strength

Tim Duy is having a debate with Scott Sumner, who insists that the strong
dollar won’t hurt US growth.

I think we need to think about this both conceptually and quantitatively, and I’m not nearly so sanguine.

Sumner says that you can’t reason from a price change; the dollar doesn’t just move for no reason, so you have to go back to the underlying cause and ask what effect it has. Actually, asset price moves
often have no clear cause — they’re bubbles, or driven by changes in long-term expectations, so you really do want to ask about the effects of price changes you can’t explain very well.

More specifically, Sumner is right that if the euro’s fall is being driven by expansionary monetary policy, this affects the U.S. through the demand channel as well as competitiveness, so it may be a wash. But
I’ve already argued that the fall in the euro is much bigger than you can explain with monetary policy; it seems to reflect
the perception that Europe is going to be depressed for the long term. And if that’s what drives the weak euro/strong dollar, it will hurt US growth.